Ian Cowie was named Consumer Affairs Journalist of the Year in the
London Press Club Awards 2012. He has been head of personal finance at
Telegraph Media Group since 2008, having been personal finance editor
since 1989. He joined the paper in 1986. He is @iancowie on Twitter.

Budget 2010: 700,000 more will pay 40pc tax

About 700,000 more people will be subject to higher rate income tax when the starting point for 40 per cent tax is lowered by £1,500 next April, accountants estimate.

The Chancellor said he wanted to prevent high earners from gaining when the personal allowance – or starting point for income tax – is raised by £1,000 next April. That change means about 23m basic rate taxpayers will pay £200 less income tax and 880,000 low earners will be spared paying any income tax.

But Mike Warburton of accountants Grant Thornton said: “The Chancellor has gone further than he needed to balance the books by also cutting the point at which you start paying 40pc tax from £43,875 now to £42,375 from next April.

“That £1,500 reduction in the threshold is worse than it looks because, had he done nothing, you would have expected the starting point to rise by about £1,500 to keep pace with inflation. As a result, I expect about 700,000 to pay 40 per cent tax for the first time.”

Pensioners will gain no benefit from the £1,000 increase in personal allowances, as these are restricted to people aged under 65. The Daily Telegraph reported fears that the coalition government’s promise to raise allowances might not apply to pensioners – and those fears have now proved justified.

However, that disappointment may be partly offset by improved inflation-linking for the basic state pension. From next April, annual increases will be calculated with reference to average pay rises for the first time in decades. Or pensions will rise in line with the annual rate of increase in the retail prices index (RPI) or 2.5pc; whichever is the greater of these three.

Against that, members of public sector pensions are likely to be worse off because of another change to indexation. Michaela Berry of pensions lawyers Sackers explained: “Public sector pension will be uprated in line with the consumer prices index (CPI), rather than the RPI in future, along with benefits and tax credits.”

That change may sound technical but could have a big impact on public sector pensions. For example, RPI increased by 5.1pc in the year to May while the CPI rose by only 3.4pc.

George Bull of accountants Baker Tilly emphasised that Budget 2010 will be a major tax-raising exercise, with much of the money coming from Value Added Tax (VAT) rising from 17.5pc to 20pc on January 4. He said: “The net effect of all the changes will be to increase revenues by £120bn over the next five years of which £54bn is scheduled to come from VAT.”

Contrary to the impression given by the Chancellor, many owners of second homes and buy to let landlords who pay basic rate tax will be caught by the new higher rate of 28 per cent capital gains tax (CGT).

Frank Nash of accountants Blick Rothenberg said: “Treasury documents make it clear that an individual’s gains will be added to their income when assessing whether they remain basic rate taxpayers for the purposes of the new higher rate of CGT.

“So, anyone whose income and gains exceed £43,875 will be liable to pay 28 per cent rather than 18 per cent CGT on gains made after midnight tonight.
“That’s a big difference and may seem very unfair on people with lumpy assets, such as second homes, which – unlike shares – cannot be sold in small parcels to stay within annual allowances or limits.”

Mr Warburton said: “Tens of thousands of people listening to the Chancellor’s speech may have thought that because they are basic rate taxpayers they will escape the CGT hike but they will find that they have been caught by a quirk in the way the system works.

“About 130,000 people paid CGT last year and the Chancellor said half of them were basic rate taxpayers. But, if they have a big disposal – such as the sale of a second home or typical buy-to-let property – they will find that the gain means they are no longer basic rate taxpayers for CGT purposes.”

David Brookes of BDO accountants added: “The Chancellor’s assurance about the 18 per cent rate sounded good but, in reality, I don’t think many people will benefit from it – other than those making relatively small gains from dabbling in the stock market.

“If you are a basic rate taxpayer who makes a substantial gain from, say, selling a second home or buy-to-let property, then that is likely to push you into the higher rate tax bracket and mean you pay CGT at 28 per cent.”

John Whiting of the Chartered Institute of Taxation added: “It was sensible to retain the £10,100 CGT allowance – because that means not too many small investors will be dragged into paying this tax.”